ING Vysya has underperformed the Bankex by 30% YTD as the expected RoA and RoE improvement failed to materialise.

We, however, believe investor concerns are overdone as the bank is on track to transform itself into a new generation private sector bank. We reiterate our thesis on the bank and highlight several key triggers that we believe will accelerate this re-rating — a pronounced decline in unionised employees will help the bank control and recalibrate employee costs and improve branch and employee productivity, which, in turn, will drive swifter RoA and RoE improvement.

Also, the decline in proportion of unionised employees could potentially make it an attractive M&A target. We expect ING Vysya to re-rate to 2.0x and believe it to be the best re-rating candidate in the banking space. Reiterate ‘buy’ with an increased fair value of R810 (R711 earlier).

After a pause of nearly two years (FY12-FY14), we believe the pace of retirement of unionised employees will pick up in FY15E. Our checks suggest approximately 200 employees are expected to retire annually starting FY15E.

We expect this number to increase to around 300-400 over the next 2-3 years as employees could opt for voluntary retirement after the finalisation of the 11th Bipartite agreement.

The retiring employees could be replaced by younger non-IBA lateral hires and this should improve employee productivity.